UK watchdog presses banks on 'ticking time bomb' of interest-only home loans

LONDON (Reuters) - Regulators told Britain’s banks on Tuesday to step up checks on 1.7 million customers with interest-only home loans who in many cases have no clear plan for repaying capital.

A worker walks past a picture of the London skyline outside the sales office of a property development in central London July 2, 2014. REUTERS/Luke MacGregor

The Financial Conduct Authority said banks and building societies are contacting customers, but a review of the market showed that some clients were reluctant to take action.

Regulators called the interest-only mortgage market a “ticking time bomb” in 2012 after it helped to fuel a housing boom ahead of the 2007-09 financial crisis.

A customer pays only interest until the loan’s term ends, when the capital must be repaid.

Such loans helped people buy a home that they otherwise could not have afforded with a traditional loan that starts to repay capital from the beginning.

Now far less common in new mortgages, one in five home loans outstanding are interest-only, many with shortfalls in repayment plans.

In 2013 an FCA review set out recommendations to deal with “peaks” in maturing loans in 2027/2028 and 2032, when customers will have to pay back the capital.

“Since 2013 good progress has been made in reducing the number of people with interest-only mortgages,” Jonathan Davies, FCA executive director of supervision, said in a statement.

“However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.”

Paul Smee, head of mortgages at UK Finance, the industry body that represents home loan lenders, said the FCA’s review showed good progress by the sector, with some areas for improvement.

“Lenders have already improved communication with their customers and will continue to do so, to ensure that customers looking for the right option at the end of their interest-only mortgages get the right advice and support,” Smee said.

The FCA has reviewed the sector for a second time, looking at 10 lenders who represent about 60 percent of the market.

It said there are currently 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in Britain, or 17.6 percent of all home loans.

The latest review show that almost 26 percent of customers with interest-only and part capital repayment loans in the first half of 2017 are from parts of the population with lower levels of disposable income.